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Paris Competition News April 2013

Paris Competition News April 2013

April 22, 2013

When a post-contractual non-reaffiliation clause in a franchise agreement becomes an anti-competitive agreement

There have been many litigation cases dealing with the validity of post-contractual non-reaffiliation clauses and the courts have generally tended to examine the extent of the restriction of the franchisee’s freedom of trade implied by such clauses, particularly in terms of their geographical scope and limitation in time. The March 6, 2013 judgment of the Paris Court of Appeal innovates in that it analyzes the lawfulness of those clauses specifically from the competition law and not the commercial law perspective, even if the reasoning adopted is not fundamentally different.

The clause under scrutiny prohibited a franchisee running a grocery store under the Shopi name, for a period of three years from the termination date of the franchise agreement and within a 5 km radius around the store, (i) from using a nationally or regionally known name and (ii) from selling the own-brand products of competing distribution chains. The invalidity of the clause was raised in a proceeding for damages for complicity in the breach of a non-reaffiliation clause, which was brought by the franchisor against a central purchasing agency having made the competing name Coccinelle available to the franchisee and supplied it with Coccinelle own-brand products. The Court of Appeal dismissed the claim for damages, finding that the clause was invalid as both its object and effect were anti-competitive.

The Court of Appeal recalled, as regards the anti-competitive object, that non-affiliation clauses and non-competition clauses are inherent in franchising since they ensure the protection of the transferred know-how but they must remain proportionate to the aim sought. In this case, the Court considered that the clause restricted the franchisee’s freedom of trade in a manner which was disproportionate in terms of the aim sought but also the duration of the restriction. Given the low level of technicality, specificity and originality of know-how in grocery stores, the Court took the view that the clause was not indispensable for the protection of the transferred know-how. The Court also observed that the non-reaffiliation obligation had been devised by the franchisor as a preventive measure to discourage its franchisees from leaving the network prematurely, a purpose which is not related to the protection of the franchisor’s competitive interests. In addition the Court judged that there was no particular technicality in retail food distribution able to justify a reaffiliation prohibition that was to last for three years.

For the anti-competitive effect, the Court found that “this double clause, because of its scope and the generality of its terms, actually prohibits any ex-franchisee, for a period of three years and in the whole of the area concerned, from operating a store similar to the store he operated as a franchisee under economically acceptable conditions”. It concluded that the obligation had effects restricting competition which were comparable to the effects of a non-competition clause.

It is an interesting judgment as it illustrates how competition law can be used as a defense argument against a claim for compensation. The demonstration that the clause was anti-competitive allowed the central purchasing agency to avoid paying damages for complicity in the breach of the non reaffiliation clause.

The European Court of Justice qualifies declarations of government support as State aids

In the France Télécom judgment of March 19, 2013, the Grand Chamber of the European Court of Justice (ECJ) addressed the sensitive question of the circumstances in which government declarations and announcements of support for an undertaking or a sector can be qualified as State aids.

In 2002, at a time when France Télécom was experiencing financial difficulties, the French government, its majority shareholder, came to its assistance by making public declarations of support which were initially vague but then became more concrete. On December 4, 2002, the French government announced a nine billion euro shareholder loan, giving the impression that it had already been made, which guaranteed the success of two bond issues of December 11 and 12, 2002. However, the corresponding offer only reached France Télécom later and was not accepted by it as it had in the meantime obtained more advantageous means of refinancing. Although the declarations undeniably represented an advantage for France Télécom (they restored the confidence of the financial markets and improved its debt-refinancing capacity), in the end no State resources were used to support France Télécom, which led the General Court of the European Union to conclude in its May 21, 2010 judgment that no State aids had been granted.

However, the ECJ reversed that earlier judgment, making an overall analysis of the French government’s various declarations and measures, and qualified them as State aids. Using an economic approach based on the effects, the ECJ held that the State’s resources do not actually need to have been committed for the advantage conferred to be qualified as State aid. Committing the State’s resources only requires a “potential additional burden” or a “sufficiently real economic risk”. Here, it was the shareholder loan offer which on its own created a potential additional burden. The dissociation of the advantage on the one hand and the resulting commitment of State resources on the other raises further issues when determining how much should be recovered and it is regrettable that the ECJ’s Grand Chamber did not answer them.

In a difficult economic climate, a significant reduction in orders does not necessarily constitute the termination of an established business relationship

Caterpillar France and Caterpillar Suisse had been commissioning Compagnie de Maintenance Industrielle (CMI) since 1985 to paint equipment and machinery manufactured by Caterpillar. CMI subsequently began to notice in 2008 a reduction in the number of Caterpillar orders which continued into 2009, at which point CMI was placed under the protection of a judicial safeguard procedure. CMI then sued its partners for damages for the abrupt termination of an established business relationship.

In a judgment of February 12, 2013, the French Supreme Court ruled that the fall in orders could not be attributed to the Caterpillar companies, since they themselves had suffered a 70% slump in their own activity between 2007 and 2008, after “the 2008 economic and financial crisis which had serious repercussions on the buildingindustries”.

The judges also noted the “distressed state of Caterpillar’s activity for the past several months” and concluded that there had been no abrupt partial termination of the established business relationship between CMI and the Caterpillar companies. This is a particularly welcome advance in case law, while naturally bearing in mind that someone who drastically reduces his volume of orders has to produce proof that he is just passing on the effect of his own difficulties.

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